I'm a thirty-year veteran of Wall Street and an outspoken critic of ineffective regulation and an advocate for economic and political sanity. Following a career as an in-house lawyer and industry regulator, I am now in private practice representing member firms, registered persons, Whistleblowers, and defrauded investors. I publish the RRBDlaw.com and the BrokeAndBroker.com websites.

FINRA Finds A Lot Of Bull In A China Shop

One brokerage firm and its staff come under scrutiny for roles in sales of the securities of two Chinese issuers

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority (“FINRA”) and without admitting or denying the findings, prior to a regulatory hearing and without an adjudication of any issue, James Sloan Altschul submitted a Letter of Acceptance, Waiver and Consent (“AWC”), which FINRA accepted. In the Matter of James Sloan Altschul, Respondent (AWC 2009019108904, January 31, 2012).

First registered in 1997, on January 5, 2010, James Altschul became the Chief Compliance Officer and the AML Compliance Officer at the New York branch of First Merger Capital, Inc., where he worked until May 3, 2010. In his compliance officer roles, Altschul was the NY branch’s designated supervisor, with responsibility for, among other matters, reviewing new customer account applications and the sales and trading activities of registered representatives; and investigating possible money laundering and taking necessary corrective action.

Oh DEER

During Altschul’s tenure at First Merger,China-based Deer Consumer Products, Inc. (“DEER“) was the most heavily solicited security by First Merger’s registered representatives, and he knew that the reps in the NY branch were actively soliciting customers. By February 2010, Altschul learned that DEER intended to pay $350,000 for certain unspecified services to entities controlled by the operators of First Merger’s NY branch. Those operators were in the process of becoming owners of the firm.

A Market Leader in the Small Household Appliances Industry: Deer Consumer Products, Inc. is a NASDAQ Global Select Market listed U.S. company with its primary operations in China. Deer has a 17-year operating business as well as a strong balance sheet. Operated by Deer’s founders and supported by more than 100 patents, trademarks, copyrights and approximately 2,000 staff, Deer is a leading provider of “DEER” branded consumer products to Chinese consumers and leading vertically integrated manufacturers of small home and kitchen appliances for global customers. DEER’s product lines include series of small household and kitchen appliances as well as personal care products designed to make modern lifestyles easier and healthier. With a large brand name global clientele and a rapidly expanding China domestic market footprint, Deer’s extensive China domestic market distribution channels are a direct access to China’s wealthier and expanding consumer markets. In 2011, Deer initiated annual cash dividend payment of $0.20 per share, payable quarterly beginning in the first quarter of 2011.

$76 Million Underwritten Public Offering of Common Stock at $11 Per Share:Wall Street investment banks William Blair & Co. and BMO Capital Markets led and completed a $17 million underwritten public offering of Deer’s common stock in December 2009. Supported by such funding, Deer has recognized rapid sales and earnings growth in the recent years while maintaining a strong balance sheet and healthy margins across its extensive product lines. Deer’s growth strategy is focused on expanding the high margin, China domestic market sales.

From February 2010 through May 3, 2010, registered representatives at the NY branch, working under the direction of some of the operators of the branch office, solicited from First Merger customers about $674,184 in DEER securities purchases; however, the AWC asserts that the soliciting representatives did not disclose that the branch operators had received $350,000 in compensation from DEER. Allegedly, Altschul took no steps to require such disclosure.

Turning Up the Heat

In February 2010, counsel for another publicly-traded China-based company, SmartHeat, Inc. (“HEAT”), referred four Chinese customers (purportedly current or former employees of the issuer) to First Merger. The AWC alleges that HEAT’s U.S. counsel obtained customer signatures on new account forms and supplied supporting documentation. According to their new account documents, three of the four Chinese customers had annual incomes between $25,000 and $50,000 and the fourth had an income between $50,000 and $100,000. Additionally, each of the customers was represented as having a net worth of between $50,000 and $100,000; and a liquid net worth of between $25,000 and $50,000.

Before approving the opening of the four accounts, Altschul purportedly never spoke to the customers or confirmed the accuracy of the various representations. Also, no one from the firm ever had any direct contact with any of the customers during the time their accounts were open at First Merger.

On February 18, 2010, the four customers deposited collectively over 3.8 million shares of HEAT. The AWC alleges that pursuant to powers of attorney he obtained, HEAT’s CEO (through US counsel) directed First Merger to begin selling the HEAT shares from the four accounts beginning on February 24, 2010. Thereafter, until Altschul left First Merger on May 3, 2010, the four customers collectively sold over $23 million of HEAT stock, via the CEO’s instructions.

SIDE BAR: HEAT’s “About SmartHeat” page on its website offers this explanation:

We are a U. S. public company operating under U. S. corporate governance”Smartheat is a Nevada registered company involved primarily in the research, production, manufacture, and sale of plate heat exchange products [PHE]. Our PHE products are utilized in industrial, commercial and residential applications.

PHEs are highly versatile products. They are commonly used in power generation and chemicals processing industries as well as shipping, automotive, petroleum refinement and derivative products, electric power and HVAC generation & distribution, edible oils, metallurgy, electronics, and food & beverages. . .

The only transactions that occurred in the four subject accounts were the HEAT sales, which generated over $1.1 million in commissions for First Merger (about 75 percent of all commissions earned during Altschul’s tenure). The AWC alleged that the above activity constituted multiple red flags that should have alerted Altschul to take action.” Consequently, FINRA alleged that Altschul failed to adequately monitor, analyze, and investigate the suspicious HEAT transactions in order to determine if it was appropriate to file a Suspicious Activity Report (“SAR-SF”) form. By engaging in the conduct described above, the AWC alleged that Altschul violated NASD Rule 3010 and FINRA Rules 2010 and 3310.

FINRA Sanctions

Accordingly, FINRA imposed the following sanctions:

$10,000 Fine;

a three-month suspension from associating with any FINRA member in all capacities that require a Series 24 license; and

an undertaking to cooperate with FINRA Department of Enforcement staff in its continuing investigation of matter #20090191089, including the prosecution of the matter before a FINRA hearing panel, by, among other things, meeting with and being interviewed by the staff without FINRA’s resorting to Rule 8210, and testifying truthfully at the hearing of any disciplinary action arising from the matter.

Another HEATed Case In Point

For the purpose of proposing a settlement of rule violations alleged by FINRA and without admitting or denying the findings, prior to a regulatory hearing and without an adjudication of any issue, Maureen Hanley Gearty submitted an AWC, which FINRA accepted. In the Matter of Maureen Hanley Gearty, Respondent (AWC 2009019108903, January 31, 2012).

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